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February Trade And Reserve Data Encouraging, China’s Policy Focus Shifts to ‘Risk Prevention’ from ‘Pro-Growth’ in 2017

Recent Chinese economic indicators have been positive. The country surprisingly recorded trade deficit, of RMB 60B, in February. The market had anticipated a decline of surplus to RMB 173B from RMB 355B in January. Imports soared +44.7% y/y while exports gained +4.2% y/y, compared with growths of +15.9% and +25.2%, respectively, in January. The sharp rise uin imports might indicate improvement in domestic demand. China’s FX reserve added +US$ 6.9B to US$ 3.01 trillion in February, marking the first increase in 8 months. The market had anticipated further decline for the month. After adjusting for currency valuation effects, the reserves probably increased US$ 19-25B in the month. While this might be the first sign of the effect of China’s capital control measures, we expect the government remain cautious as outflow should remain a problem for the rest of year. Note that a reason for the uptick in February was the improved performance of renminbi at the beginning of the year. Further information, including PBOC’s FX position and SAFE flow data, is needed to grasp a clearer outlook of the capital flow situation. We remains bearish over renminbi as the Fed’s monetary policy normalization program should continue to support USDCNY.

Separately, China’s Premier Li Keqiang in his working report to the National People’s Congress outlined a more benign economic growth outlook for the year. The GDP growth target for this year is "around 6.5%, or higher if possible", down from 2016’s 6.5-7.0%. Inflation target stays at around 3% and a fiscal deficit at around 3% of GDP. The growth target of money supply M2 has been lowered, by -1 percentage point, to 12%. Also suggested in the Work Report, the RMB exchange rate will "be further liberalized, and the currency’s stable position in the global monetary system will be maintained". It is apparent that the policy focus has shifted from a pro-growth one to one that aims at stable social and economic developments and prevention of macro risks. Meanwhile, we believe a stable monetary policy stance, as suggested by the government, refers to one with tightening bias. Yet, the tightening is targeted more at the asset market but not at cooling the real economy.

This year’s growth target, at ‘around +6.5%’, allows the government more flexibility. The tolerance of lower growth was probably a lesson learnt from the past two years as the government had to revise lower the targets after actual growth turned out weaker than expected. This also reflects that the policy focus has shifted from pursuing growth to reining in financial risks and leverage. Growth targets for total social financing (TSF) and M2 were trimmed one percentage point to +12% in 2017. The fact that TSF growth target is lower than the 2016’s growth of +12.8% might signal the government’s credit tightening policy in certain areas, such as real estate. The M2 growth target is higher than last year’s growth of +11.3%. That said, the more conservative forecast for this year, when compared with last year, still reflects a tightening bias in monetary policy stance.

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